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Product crack | Motilal Oswal MOSt 10 Year Gilt Fund

Product crack | Motilal Oswal MOSt 10 Year Gilt Fund
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First Published: Wed, Nov 16 2011. 08 17 PM IST

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Updated: Wed, Nov 16 2011. 08 17 PM IST
What is it?
Interest rates in India appear to be nearing their peak and fund houses are getting active in the debt space, especially with long-term bond funds. Keeping in mind its passive fund management philosophy, Motilal Oswal Asset Management Co. Ltd is set to launch a near-passive government securities (gilt or G-sec) fund. Called Motilal Oswal MOSt 10 Year Gilt Fund (Most10), the scheme will invest at least 90% in 10-year government securities (G-secs). The rest will get invested in either other G-secs maturing between seven and 12 years and/or cash.
What works?
Most10’s investment strategy ensures that the average maturity of the scheme remains 10 years at all times compared with other gilt funds that invest in a host of G-secs across all maturities and are, therefore, actively managed. As a result, though they claim to be long-term gilt funds, some of them aggressively reduce their maturities when interest rates are rising. For instance, as per data provided by Value Research, a mutual fund tracking firm, long- and medium-term gilt funds had an average maturity of 12.8 years as on December 2007 and went down to 1.4 years in just six months (June 2008). Some gilt funds that have the flexibility to raise or reduce their average maturities do this more aggressively. ING Gilt PF Dynamic’s average maturity as on June 2008 was 0.003 years, down from 15.720 years in 2007-end.
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Ten-year G-secs are India’s most liquid debt securities. Simply put, it is debt that is owed by the government of India to the public. Since the Indian government is considered a risk-free borrower, investors use this as a benchmark for long-term interest rates. Most10 will mostly have only 10-year G-secs in its portfolio.
What doesn’t?
What ails passive equity funds affects Most10, which is almost a passive fund. If rates get volatile, an active G-sec fund will shift to securities with lower tenors. Most10 will not be able to do so, in which case there will be phases—sometimes long ones—when it may underperform other gilt funds. Gilt funds are also more volatile than other debt funds because G-secs are generally more volatile as they are more liquid and are, therefore, traded more number of times than most other debt securities.
What should you do?
Nobody knows for sure how long it will take for interest rates to start falling, but it is a good time to allocate a portion of your debt portfolio to long-term debt funds. If you want to avoid fund manager risk, Most10 is a decent option. When interest rates fall, it’s tough to beat passively managed debt funds. It’s only when interest rates turn volatile or flat that a well-managed active fund can outperform schemes like Most10. Take your pick.
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First Published: Wed, Nov 16 2011. 08 17 PM IST